System for financial risk management administration

ABSTRACT

The present invention provides a method and system for financial risk management and administration. In the present invention, a computer implemented method and system operate to distribute selected risks, such as market risks, through a selected counterparty that can assume certain of these market risks in a financial transaction which also includes certain behavioral risks.

FIELD OF THE INVENTION

The present invention generally relates to the field of administeringfinancial risks. More specifically, the present invention discloses anovel method and system for redistribution of risks involved infinancial transactions.

BACKGROUND OF THE INVENTION

Often, individuals will seek to guarantee a steady stream of income forsituations when their regular income is either diminished or altogetherunavailable (e.g. retirement, times of financial hardship, etc).Additionally, individuals may make an investment in order to expandtheir income at a later date. In such cases, these individuals willoften invest their existing funds, in order to guarantee a stream ofpayments of the invested amount, as well as to receive return from theinvestment at a later time. This type of investment is generally knownas an “annuity.”

An individual investing in an annuity (and upon whose life the incomepayments will be based) is known as an “annuitant.” The individualreceiving payments from the annuity is known as the “contract owner.”The contract owner and the annuitant are often but not necessarily thesame individual.

The annuity has two phases: an accumulation phase, during which thecontract builds a cash value and money is added, and a payout phase,during which the funds are distributed. An annuitant may choose topurchase an annuity with a lump sum, or may make continuous paymentsinto an annuity fund. Regardless of the payment method chosen by theannuitant, the financial or insurance institution offering an annuitywill begin making periodic payments to and stop receiving funds from theannuitant on a predetermined date, this is known as “annuitization.”

Two common types of annuities are-known as fixed annuities (“FA”) andvariable annuities (“VA”). Upon annuitization, fixed annuities offerpayments of predetermined value, or of sums that increase by a setpercentage. Conversely, upon annuitization, variable annuities offerpayments determined by the performance of a particular investment option(e.g. bonds).

With a variable annuity, the annuity contract owner bears the investmentrisk. The relevant life typically has a choice of investment options inwhich he/she can direct where the annuity deposits will be invested.These various investment options, or sub-accounts, may include stocks,bonds, money market instruments, mutual funds and the like.

Since the yield of a variable annuity is dependent on the specificsub-accounts, the risk involved in purchasing a variable annuity isproportional to the risk involved in investing in the underlyingsub-accounts. While a potential annuitant may be interested in aspecific investment option, the risk involved over a long period of timebefore annuitization may be unappealing. In such a case, the financialinstitution or insurance company offering the variable annuity productmay elect to guarantee a certain minimum return on the annuitant'sinvestment. Similarly, insurance companies and financial institutionsseeking to sell or insure other financial products having some risk mayoffer guarantees or insurance on the performance of the financialproducts. Thus, the financial or insurance institution would assume someof the risk involved in purchasing a variable annuity product or othernon-insurance financial product.

Variable annuity contracts can also provide a death benefit. Usually,during the accumulation period, this death benefit is related to thevalue of the underlying sub-accounts, or contract value. That is, if thesub-accounts backing the contract value have performed poorly, then thedeath benefit may be reduced to an insignificant amount. Afterannuitization, the death benefit can be a function of the remainingpayments of the annuity at the time of the relevant life's death.

Annuity contracts may also provide guarantees in several differentvariations. A Guaranteed Minimum Death Benefit (“GMDB”) is a guaranteethat provides a minimum benefit at the death of the relevant liferegardless of the performance of the underlying investments. AGuaranteed Minimum Income Benefit (“GMIB”) is a guarantee that willprovide a specified minimum income amount at the time the contract isannuitized. The income payment will be dependent on previously stateddetails set out in the contract.

A Guaranteed Minimum Accumulation Benefit (“GMAB”) is a benefit thatguarantees a specified minimum contract value at a certain date in thefuture, even if actual investment performance of the contract is lessthan the guaranteed amount. A Guaranteed Minimum Withdrawal Benefit(“GMWB”) is a guarantee of income for a specified period of time, and insome versions, the income stream is guaranteed for life withoutrequiring annuitization as in the guaranteed minimum income benefit.However, this guarantee will automatically annuitize the contract if thecontract value is reduced to zero or some other amount specified in thecontract or rider (as described below). Further, if the annuity contractdoes not provide a guarantee (e.g. GMIB, GMWB, etc.), the contract willterminate when the contract value goes to $0 or some other amountspecified in the contract.

The guarantees form a class of liabilities collectively referred to asvariable annuity guaranteed benefits (“VAGB”). These guarantees areknown as “riders.” The contract holder can purchase riders in order toguarantee a certain minimum performance criteria for underlying separateaccounts. To the extent that the underlying investments do not performin such a way so that the minimum criteria are met, the writinginsurance company must subsidize the difference between the minimumperformance that the VAGB guarantees and the actual performance of theunderlying sub-accounts.

VAGBs can be further subdivided into several different categories, whichare shown in FIG. 1. Two common categories of VAGBs 104 are variableannuity guaranteed minimum death benefits (“VAGMDB”) 106 and variableannuity guaranteed living benefits (“VAGLB”) 108.

The VAGMDB 106 is commonly implemented as one the following three (3)manifestations: return of premium death benefits (“ROPDB”) 110, highwatermark and/or periodic ratchet death benefits (“HWDB/PRDB”) 112, andearnings enhancement death benefits (“EEDB”).

The VAGLB 108 is commonly implemented as one the following three (3)manifestations: variable annuity guaranteed minimum accumulationbenefits (“GMAB”) 116, variable annuity guaranteed minimum incomebenefits (“GMIB”) 118, and variable annuity guaranteed minimumwithdrawal benefits (“GMWB”) 120. This is not intended as an exhaustivelist, but rather, a broad overview of the general trend of VAGBscurrently available.

As previously discussed, two types of VAGBs are VAGMDB and VAGLB. Thefundamental difference between VAGMDBs and VAGLBs is that the formerrequires,that the annuitant die in order for the contract holder torealize the incremental value afforded by the guarantee. On thecontrary, VAGLBs permit the contract holder to realize some or all ofthe benefit of the guarantee while the annuitant is living.

Naturally, regardless of the specific form taken by a particular VAGB,there is significant risk that the underlying sub-accounts perform in amanner that is inadequate to meet the minimum performance criteria.Financial and insurance institutions offering VAs are often interestedin decreasing the risks entailed in the sale of a variable annuity.

Historically, many financial and insurance institutions have purchasedreinsurance in an attempt to share the risk that there will beinadequate funds available to cover these guarantees, or to spread anyrisks associated with purchase or investment in other financialproducts. Typically, reinsurance companies spread risks by pooling therisks of multiple companies and contracts. Specifically, insurancecompanies pay a premium to cede a portion of their risk so that iflosses are above a negotiated amount, the reinsurance company willreimburse the insurance company for these excess losses. Since thereinsurance company assumes risks from multiple companies, any lossesincurred from business assumed from one insurance company are expectedto be outweighed by profits from another company, thus allowing thereinsurance company to make a profit. Over the years, most reinsurershave withdrawn from providing coverage for variable annuity contractshaving features such as those described above because of the highcorrelation among the contracts, and thus the risk could not bemitigated by pooling risks from multiple companies. Because of theinability of insurance companies to reinsure variable annuity contracts,they incurred large economic losses during the stock market decline from2000 to 2002. Similarly, financial products such as credit cardreceivable derivatives and mortgage backed securities, or the like, mayhave the bulk of the underlying securities subject to similar risks thatmay affect the financial product as a whole.

Another method of mitigating these risks is known as a “hedge,” whileinvesting in a hedge is known as “hedging.” To protect the variableannuity contract holders, and to ensure the claims-paying ability of thewriting insurance company, hedging programs are often maintained byinsurance carriers to offset the risk associated with the riders.

Hedging is a strategy that entails making an investment, the gains ofwhich will offset the losses of a business risk, thus allowing thehedging entity to benefit from a gain involved in a particular businesstransaction while offsetting losses. Commonly, hedging is used todiminish the risk factors involved in a specific investment, but canalso be used to manage the risks involved in guaranteeing a minimumincome to an annuitant on a variable annuity, or for a group ofannuitants whose variable annuities depend on the same or similarfactors. Similarly, for other financial products, hedging may be used tomanage the risk involving the value of the asset backing the financialproduct.

Various strategies are being employed to manage GMWB and GMDB risks, orthe risks of other financial products: (a) Delta hedging (uncertaineffectiveness since a GMWB's exposure to “vega” (implied volatility) isnot hedgeable with futures, and substantial EPS (earnings per share) andeconomic risks remain); (b) Multi-greek hedging with futures and vanillaoptions (reasonably effective to hedge economic and EPS exposure overintermediate term and stable markets, but long term effectiveness isuncertain due to cost and exposure to second and third order risks); and(c) Multi-greek hedging with futures, vanilla options, and exotic equityoptions (reasonably effective to hedge EPS exposure over intermediateterm and stable markets, but long term effectiveness is not wellunderstood).

Hedging programs can vary significantly but generally proceed accordingto the following pseudo-algorithm:

-   -   Construction of a mathematical valuation model to compute an        estimate of the value of the written guarantee liability,        conditional upon a set of relevant capital markets data and        assumptions for annuitant behavior.    -   Gathering required capital markets data, dependent upon the        structure of the guarantee and the contractually permissible set        of investment options, but generally including:        -   The spot price of relevant equity indices.        -   The term structure of interest rates denominated in all of            the currencies that are reflected in the valuation model.        -   The spot price of relevant cross-currency exchange rates            associated with all of the currency pairs that are reflected            in the valuation model.        -   The forward implied dividend curves for each of the relevant            equity indices.        -   A sub-model for the volatility associated with the price of            the equity indices.        -   A sub-model for the volatility associated with the relevant            cross-currency exchange rates.        -   A sub-model for the volatility associated with the interest            rates of all relevant term structure.    -   Formulating assumptions of annuitant behavior, dependent upon        the structure of the guarantee, but generally including:        -   Assumed rates of mortality for individual annuitants, or a            sub-model for stochastic mortality.        -   Assumed rates of lapsation for individual annuitants and/or            a predefined algorithm (deterministic or stochastic) for            future lapsation rates that is a function of other variables            in the valuation (so-called “dynamic lapsation”).        -   Assumed rates of utilization for behavioral choices granted            to the contract holder under the terms of the guarantee,            such as size and frequency of periodic withdrawal of funds            from the variable annuity contract and/or a predefined            algorithm (deterministic or stochastic) for future            utilization that is a function of other variables in the            valuation (“dynamic utilization”).        -   Size, style and frequency of transfer of funds between            investment options and/or a predefined algorithm            (deterministic or stochastic) for future transfers that is a            function of other variables in the valuation.    -   Defining a series of sets of unexpected fluctuations (“shocks”)        to be applied to capital markets data.    -   Running the valuation model and computing an estimate of the        valuation of the written liability under the “base case” market        data and under each set of shocks. This information can be used        to determine an estimate of the base valuation of the written        liability and of the sensitivities of the valuation estimate to        changes in specific capital markets data. (The estimate of the        base valuation of the written liability and the estimate of the        sensitivities of the valuation estimate to changes in specific        capital markets data are known in the art as “Greeks”).    -   Formulating a hedge portfolio and executing an analogous        valuation/sensitivity exercise to calculate the base valuation        and the Greeks.    -   Executing trades in the hedge portfolio that position the        aggregated Greeks of the hedge portfolio to be within desired        ranges relative to the liability Greeks.

Several useful notations are defined as follows:

-   -   ƒ_(L) ^(B) is the liability valuation under the base case set of        capital markets assumptions    -   δ_(L) is the liability delta    -   κ_(L) is the liability vega    -   ρ_(L) is the liability rho

Furthermore, it should be noted that the liability delta is defined asthe sensitivity of the VAGB valuation to instantaneous changes in stockor stock index levels, the liability vega is defined as the sensitivityof the VAGB valuation to instantaneous changes in stock or stock indeximplied volatility levels, and the liability rho is defined as thesensitivity of the VAGB valuation to instantaneous changes in interestrates.

Additionally, there are innumerable other Greeks that can be defined andmanaged as part of a hedge program. Those may include the followingadditional metrics:

deltas with respect to foreign currency exchange rates,

“partial” or “bucket” vegas which are sensitivities of the VAGBvaluation to implied volatilities of a specific tenor rather than to theimplied volatility surface as a whole,

“partial” or “key rate” rhos which are sensitivities of the VAGBvaluation to interest rates of a specific tenor rather than to theentire yield curve in parallel,

“correlation vegas” which are the sensitivities of the VAGB valuation tochanges in the level of correlation between set of capital marketsvariables assumed to be stochastic,

“theta,” which is the sensitivity of the VAGB valuation to the passageof time,

any number of higher-order sensitivities, and

any number of cross-gammas.

Finally, it should be noted that the above is by no means meant to be anexhaustive list of all possible Greeks, but merely an illustrativedescription of some Greeks that may be instrumental in understanding thesubject matter of the invention.

The following is an example of hedging the liability associated with aVA. Assuming a VA guarantee has been written on a VA contract in whichthe policyholder's funds are invested in a single asset, and supposingthe writing insurance company wishes to implement a 3-Greek first orderhedge to offset delta, vega, and rho risk. Let ƒ_(L)(x,y,z) be theliability valuation estimate computed after a hypothetical change to theunderlying stock index of x, a hypothetical change to the underlyingindex volatility of y, and a hypothetical change to the underlyinginterest rate term structure of z.

In classic terminology, the three Greeks of the liability would becomputed using a finite-differencing methodology as follows:

ƒ_(L) ^(B)=ƒ(0,0,0)

δ_(L)=ƒ_(L)(1,0,0)−ƒ_(L)(0,0,0)=ƒ_(L)(1,0,0)−ƒ_(L) ^(B)

κ_(L)=ƒ_(L)(0,0.01,0)−ƒ_(L)(0,0,0)=ƒ_(L)(0,0.01,0)−ƒ_(L) ^(B)

ρ_(L)=ƒ_(L)(0,0,0.0001)−ƒ_(L)(0,0,0)=ƒ_(L)(0,0,0.0001)−ƒ_(L) ^(B)

Similar metrics can be calculated for a portfolio of hedging assets.Using analogous notation, a standard goal of a hedging program would beto formulate a portfolio of hedging assets that, minimally, meets thefollowing criteria:

${{\delta_{A} - \delta_{L}}} < {ɛ_{\delta}\mspace{14mu} {and}\text{/}{or}\mspace{14mu} ɛ_{\delta,1}} < \frac{\delta_{A}}{\delta_{L}} < ɛ_{\delta,2}$${{\kappa_{A} - \kappa_{L}}} < {ɛ_{\kappa}\mspace{14mu} {and}\text{/}{or}\mspace{14mu} ɛ_{\kappa,1}} < \frac{\kappa_{A}}{\kappa_{L}} < ɛ_{\kappa,2}$${{\rho_{A} - \rho_{L}}} < {ɛ_{\rho}\mspace{14mu} {and}\text{/}{or}\mspace{14mu} ɛ_{\rho,1}} < \frac{\rho_{A}}{\rho_{L}} < ɛ_{\rho,2}$

Wherein, the ε (“epsilon”) represents tolerance imposed on themanagement of the portfolio. Notably, they need not be constant,although they are expressed that way above. The above examplesdemonstrate first-order hedging only in a 3-Greek framework, but similarexercises can and are performed related to higher-order Greeks andcross-gammas. That is, second-order Greeks and cross-gammas can becalculated using analogous finite differencing methodologies andanalogous hedge tolerances can be defined. Furthermore, each of theabove three equations represents the hedging of a different Greek (i.e.delta, vega, and rho). Additionally, the main difference between thefirst and second condition, in each of the above three equations, iswhether the deviation in liability and asset Greeks is viewed on anabsolute and/or a relative basis.

The motivation for Greek-matching is to produce gains or losses thatoffset losses or gains made on the liability. For example, suppose thatthe price of the underlying asset were to decrease by one. This wouldresult in a change (generally a loss in the case of VA guarantees) ofδ_(L). However, due to the construction of the asset portfolio, thehedges will experience a change in value (generally a gain in the caseof VA guarantee hedges) of δ_(A). Since the hedging process ensures thatthe difference between δ_(A) and δ_(L) is small, the net economic impacton the company is also small, making the company reasonably indifferentto small changes in these capital market variables.

Among other factors, hedging effectiveness on VA guarantees usinggeneric hedging instruments, known as “vanilla hedging instruments,” isdependent upon the size, frequency and correlation of movements incritical capital markets variables. Generally, small changes invaluation inputs will not cause a hedge to materially loseeffectiveness. Depending upon the nature of the guarantee written, aswell as upon the exact instruments chosen for hedging, there are twocharacteristics of VA guarantee liabilities that cause hedgingineffectiveness in existing systems for guaranteeing benefits usinghedging: 1) the instance where valuation inputs experience large and/orsudden changes, and 2) when several of the inputs move together.

Because current hedging programs are incomplete and uncertain, there isa clear need in the art for a system and method to more effectivelyredistribute the risk associated with variable annuities. The presentinvention overcomes the various deficiencies associated with traditionalsurvival hedging programs.

SUMMARY OF THE INVENTION

The present invention comprises a method and system for distributing therisks associated with an insurance instrument (e.g. insurance policy) ora multitude of other financial products provided by an insuranceprovider to an individual or group. The method includes the steps ofassessing the behavior of the insured individual by the insuranceprovider, modeling the risks associated with providing insurance to theindividual by the insurance provider, assessing the market risksassociated with providing the insurance policy by a derivativecounterparty and assuming, by the derivative counterparty, market risksassociated with providing the insurance instrument.

The system for distributing risks associated with an insurance policyissued by an insurance provider includes a data storage module forstoring information associated with the insurance policy, a computingsystem in electronic communication with the data storage module and theinsurance provider, the computing system including a risk assessmentmodule for assessing the risks associated with the issuance of theinsurance policy, the risks including behavior risks and market risksand a derivative counterparty for assuming the market risks.

In light of the foregoing, it is an object of the present invention tomanage the risks involved in providing an insurance policy.

Furthermore, it is another object of the present invention to ensurethat premiums received by an insurance provider are secured regardlessof the performance of specific investment vehicles.

It is another object of the invention to provide a system for managingrisks associated with an insurance instrument issued by an insuranceprovider. The system includes a data storage module for storinginformation associated with the insurance instrument, a computing systemin electronic communication with the data storage module and theinsurance provider, the computing system including a risk assessmentmodule for assessing the risks associated with the issuance of theinsurance instrument, the risks including behavior risks and marketrisks and an external party for assuming the market risks.

The computing system includes a display module, a data entry module, aprocessing module, a calculation module and one or more communicationmodules and is operated by a party separate from the insurance provider.The data storage module may be external to or internal to the insuranceprovider. The insurance instrument can be an insurance policy and therisks are calculated periodically. The system further includes areporting module for producing reports of information associated withthe insurance instrument, a communication module for passing the marketrisk to an external system and a second communication module for passingthe risks associated with the issuance of the insurance instrument to athird party.

Yet another object of the invention is to provide a system for managingrisks associated with an insurance instrument issued by an insuranceprovider. The system includes a data storage module for storinginformation associated with the insurance instrument, a computing systemin electronic communication with the data storage module and theinsurance provider, the computing system including a risk assessmentmodule for assessing the risks associated with the issuance of theinsurance instrument, the risks including behavior risks and marketrisks, wherein the market risks are transferred outside of the insuranceprovider.

The computing system includes a display module, a data entry module, aprocessing module, a calculation module and one or more communicationmodules. The data storage module may be external or internal to theinsurance company.

The risks are calculated periodically and the insurance instrument maybe an insurance policy or other risk mitigation guarantee. The systemfurther includes a reporting module for producing reports of informationassociated with the insurance policies.

It is another object of the invention to provide a system for managingrisks associated with an insurance instrument issued by an insuranceprovider. The system includes a data storage module for storinginformation associated with the investment instrument and a computingsystem in electronic communication with the data storage module and thederivative counterparty. The computing system includes a risk assessmentmodule for assessing the risks associated with the investmentinstrument. The risks include market risks, and the market risks assumedby the derivative counterparty.

The computing system may be operated on by a party separate from thederivative counterparty. Furthermore, the computing system includes adisplay module, a data entry module, a processing module, a calculationmodule, a reporting module for producing reports of informationassociated with the investment instrument and one or more communicationmodules. The data storage module may be external or internal to thederivative counterparty.

The market risks may be calculated periodically. Additionally, thesystem may contain a second communication module for receiving themarket risk data from an external system.

It is another object of the invention to provide a method fordistributing the risks associated with an insurance instrument providedby an insurance provider to an individual or a group. The methodincludes the steps of assessing the behavior of the individual, group orunderlying asset by the insurance provider, modeling the risksassociated with providing insurance to the individual, group orunderlying asset by the insurance provider, transferring the market riskto an external party, assessing by the external party the market risksassociated with providing the insurance instrument, the external partyreceiving from the insurance provider: fixed rate, cash settlementamount, and shadow account information, and the external partydetermining the price of the fixed rate.

The price of the fixed rate may be determined for a time period rangingfrom 20 to 50 years and the price of the fixed rate may be fixed for thetime period ranging from 20 to 50 years. However, the price may bedetermined and fixed for any time period (i.e. 10 years, 7 years, 5years, 1 year, etc,) agreed upon by all the parties involved, withoutdeparting for the spirit of the invention. Alternatively, the fixed rateamount may be determined using a mortality table, and at least in partby the average mortality rate.

The method may include the step of ceding the risks associated withproviding insurance to the individual or group by the insurance providerto a reinsurance provider and may also include the step of participatingin a derivative transaction by the external party. The steps ofassessing the behavior and modeling the risk may be conducted by a partyseparate from the insurance provider.

The external party may guaranty to the insurance provider a minimumreturn on investment funds.

The step of modeling the risks associated with providing insurance tothe individual or group includes the step of modeling the riskassociated with providing insurance to a member of a demographic, orclass of underlying asset to which the individual, group or underlyingasset belongs and the step of assessing the behavior of the individualor group includes the step of assessing reported history of insurancerelated behaviors by the individual, group or underlying asset which mayincrease or decrease the risk associated with issuing the insuranceinstrument to the individual or group.

The method further includes the step of the insurance provider assumingthe risks associated with issuing the insurance instrument, investing bythe individual or group in an insurance dedicated investment vehicle orinsurer's general account, and investing by the insurance provider or anexternal party into an investment vehicle funds invested by theindividual or group.

One aspect of the present invention may include mapping of theinvestments made by either an insured individual, an insurance provider,or a financial institution unto more hedgeable indices or investmentvehicles, this is done using mathematical analysis such as regression.

The investment vehicle is selected from a group of stocks, bonds, realestate and other investment vehicles comprising the following: insurer'sgeneral account, insurance dedicated investment vehicle, money market,equities, stock index, stock option, securities, asset backed security,derivative market, credit derivative, hybrid security, futures,forwards, swaps, corporate bond, government bond, municipal bond, bondvaluation, high-yield debt, commodities market, OTC market, real estatemarket, and spot market. The stock indices are selected from a groupcomprising the following: S&P 500 TR index, EAFE US TR index, NASDAQ-100TR index, Lehman US Agg index, and LIBOR index.

Although multiple investment options have been listed above this listshould not be considered exhaustive but merely illustrative, as themethod and system described herein may be used with any investmentoption without departing from the spirit of the present invention.

It is another object of the invention to provide a method fordistributing the market risks associated with an insurance instrumentfrom an insurance provider to a derivative counterparty including thesteps of assessing the market risks associated with providing theinsurance instrument by a derivative counterparty, assuming, by thederivative counterparty, market risks associated with providing theinsurance instrument, the derivative counterparty receiving from theinsurance provider fixed rate, cash settlement amount, and shadowaccount information, and determining the price of the fixed rate by thederivative counterparty.

The price of the fixed rate may be determined for a time period rangingfrom 20 to 50 years and may be fixed during that time. However, theprice may be determined and fixed for any time period (i.e. 10 years, 7years, 5 years, 1 year, etc,) agreed upon by all the parties involvedwithout departing for the spirit of the invention. Alternatively, thefixed rate amount may be determined using a mortality table, and atleast in part by the average mortality rate.

The steps of assessing the behavior and modeling the risk are conductedby a party separate from the derivative counterparty, the step of thederivative counterparty guaranteeing to the insurance provider a minimumreturn on investment funds, and the insurance provider receiving fromthe derivative counterparty the cash settlement amount.

The step of modeling the risks associated with providing insurance tothe individual or group includes the step of modeling the riskassociated with providing insurance to a member of a demographic towhich the individual or group belongs. The step of assessing thebehavior of the individual or group includes the step of assessingreported history of insurance related behaviors by the individual orgroup which may increase or decrease the risk associated with issuingthe insurance instrument to the individual or group.

The insurance provider assumes the risks associated with issuing theinsurance instrument and the step of assessing the market risk isperformed by the insurance provider or the derivative counterparty.

Investing by the individual or group in an insurance dedicatedinvestment vehicle or insurer's general account, and investing by theinsurance provider or an external party into an investment vehicle fundsinvested by the individual or group.

One aspect of the present invention may include mapping of theinvestments made by an insured individual, an insurance provider, or afinancial institution unto more hedgeable indices or investmentvehicles, this is done using mathematical analysis such as regression.

The investment vehicle is selected from a group of stocks, bonds, realestate and other investment vehicles comprising the following: insurer'sgeneral account, insurance dedicated investment vehicle, money market,equities, stock index, stock option, securities, asset backed security,derivative market, credit derivative, hybrid security, futures,forwards, swaps, corporate bond, government bond, municipal bond, bondvaluation, high-yield debt, commodities market, OTC market, real estatemarket, and spot market. The stock indices are selected from a groupcomprising the following: S&P 500 TR index, EAFE US TR index, NASDAQ-100TR index, Lehman US Agg index, and LIBOR index.

Although multiple investment options have been listed above this listshould not be considered exhaustive but merely illustrative, as themethod and system described herein may be used with any investmentoption without departing from the spirit of the present invention.

Still another object of the invention is to provide a method fordistributing the risks associated with an insurance instrument providedby an insurance provider to an individual or a group. The methodincludes the steps of assessing the behavior of the individual or groupby the insurance provider, modeling the risks associated with providinginsurance to the individual or group by the insurance provider,assessing the market risks associated with providing the insuranceinstrument by a derivative counterparty, assuming by the derivativecounterparty market risks associated with providing the insuranceinstrument.

Furthermore, the method includes the step of the derivative counterpartyreceiving from the insurance provider: fixed rate, cash settlementamount, and shadow account information.

Additionally, the derivative counterparty guarantees to the insuranceprovider a minimum return on investment. The insurance provider receivesfrom the derivative counterparty: the cash settlement amount. Whereinmodeling the risks associated with providing insurance to the individualor group includes the step of modeling the risk associated withproviding insurance to a member of a demographic to which the individualor group belongs.

Additionally, assessing the behavior of the individual or group includesassessing reported history of insurance related behaviors by theindividual or group which may increase or decrease the risk associatedwith issuing the insurance instrument to the individual or group.Furthermore, the insurance provider may assume the risks associated withissuing the insurance instrument, and assess the market risk. Thederivative counterparty may also assess and assume the market risk.

Further, investing by the individual or group in an insurance dedicatedinvestment vehicle or insurer's general account, and investing by theinsurance provider or an external party into an investment vehicle fundsinvested by the individual or group. One aspect of the present inventionmay include mapping of the investments made by either an insuredindividual, an insurance provider, or a financial institution unto morehedgeable indices or investment vehicles, this is done usingmathematical analysis such as regression.

The investment vehicle is selected from a group of stocks, bonds, realestate and other investment vehicles comprising the following: insurer'sgeneral account, insurance dedicated investment vehicle, money market,equities, stock index, stock option, securities, asset backed security,derivative market, credit derivative, hybrid security, futures,forwards, swaps, corporate bond, government bond, municipal bond, bondvaluation, high-yield debt, commodities market, OTC market, real estatemarket, and spot market. The stock indices are selected from a groupcomprising the following: S&P 500 TR index, EAFE US TR index, NASDAQ-100TR index, Lehman US Agg index, and LIBOR index.

Although multiple investment options have been listed above this listshould not be considered exhaustive but merely illustrative, as themethod and system described herein may be used with any investmentoption without departing from the spirit of the present invention.

It is another object of the invention to provide a method of accountingfor the risk associated with providing an insurance instrument by aninsurance provider as well as market risks by a derivative counterparty,for at least one reporting period, including the steps of, determining atotal account value for an account associated with an insuranceinstrument, rolling the total account value forward, determining theamount of withdrawal dollars for the account, decrementing the amount ofwithdrawal dollars, determining a claim for the account, determining alapse rate for the account, determining a mortality rate for theaccount, adjusting the account value for lapses, adjusting the accountvalue for mortality, determining whether the account value should bereset and resetting the account value if a reset is determined asnecessary.

The account value is at least in part determined by a sub-account valueand the sub-account value is determined by an investment vehicle. Thesub-account value is determined by an investment vehicle selected from agroup of stocks, bonds, real estate and other investment vehiclescomprising the following: insurance dedicated investment vehicle,insurer's general account, money market, stock index, stock option,securities, asset backed security, derivative market, credit derivative,hybrid security, futures, forwards, swaps, corporate bond, governmentbond, municipal bond, bond valuation, high-yield debt, commoditiesmarket, OTC market, real estate market, and spot market. The stock indexis selected from a group comprising the following: S&P 500 TR index,EAFE US TR index, NASDAQ-100 TR index, Lehman US Agg index, and LIBORindex.

Although multiple investment options have been listed above this listshould not be considered exhaustive, as the method and system describedherein may be used with any investment option without departing from thespirit of the present invention.

Alternatively, an insured individual is assumed to be invested in aninsurer's general account or an insurance dedicated investment vehicle.Furthermore, the investments made by an insured individual is mappedunto more hedgeable indices or investment vehicles, this is done usingmathematical analysis such as regression.

The investment vehicle is selected from a broad group consisting of:equities, bonds, real estate market, and other asset classes. Theinvestment vehicle my further be mapped unto a more narrow groupcomprising the following: insurer's general account, insurance dedicatedinvestment vehicle, money market, stock index, stock option, securities,asset backed security, derivative market, credit derivative, hybridsecurity, futures, forwards, swaps, corporate bond, government bond,municipal bond, bond valuation, high-yield debt, commodities market, OTCmarket, and spot market. The stock indices are selected from a groupcomprising the following: S&P 500 TR index, EAFE US TR index, NASDAQ-100TR index, Lehman US Agg index, and LIBOR index.

Although multiple investment options have been listed above this listshould not be considered exhaustive but merely illustrative, as themethod and system described herein may be used with any investmentoption without departing from the spirit of the present invention.

A rebalance status is determined and a cash settlement amount isdetermined by calculating fees owed by the derivative counterparty tothe insurance provider at least in part using the rebalance status andthe account value.

It is another object of the invention to provide a method of accountingfor the risk associated with providing an insurance instrument by aninsurance provider and mitigating market risk by a derivativecounterparty, wherein an account is associated with the insuranceinstrument and the insurance instrument causes risk of losses to theinsurance provider, including the steps of rolling the total accountvalue forward from the policy effective date to the first of the atleast one reporting period for the account associated with the insuranceinstrument, rolling a guaranteed remaining benefits forward from apolicy effective date to the first of the at least one reporting periodfor the account associated with the insurance instrument, adjusting ofdata related to insurance instrument duration for the account associatedwith the insurance instrument and calculating fees owed by thederivative counterparty to the insurance provider using at least in partthe data related to insurance instrument duration as well as guaranteedremaining benefits.

The account value is at least in part determined by a sub-account value.The sub-account value is determined by an investment vehicle selectedfrom a group of stocks, bonds, real estate and other investment vehiclescomprising the following: insurance dedicated investment vehicle,insurer's general account, money market, stock index, stock option,securities, asset backed security, derivative market, credit derivative,hybrid security, futures, forwards, swaps, corporate bond, governmentbond, municipal bond, bond valuation, high-yield debt, commoditiesmarket, OTC market, real estate market, and spot market. The stock indexis selected from a group comprising the following: S&P 500 TR index,EAFE US TR index, NASDAQ-100 TR index, Lehman US Agg index, and LIBORindex. Although multiple investment options have been listed above thislist should not be considered exhaustive, as the method and systemdescribed herein may be used with any investment option withoutdeparting from the spirit of the present invention.

Alternatively, an insured individual is assumed to be invested in aninsurer's general account or an insurance dedicated investment vehicle,wherein the account value depends on these investment options.

Further, the investments made by an insured individual is mapped untomore hedgeable indices or investment vehicles, this is done usingmathematical analysis such as regression. The investment vehicle isselected from a broad group consisting of: equities, bonds, real estatemarket, and other asset classes. The investment vehicle my further bemapped unto a more narrow group comprising the following: insurer'sgeneral account, insurance dedicated investment vehicle, money market,stock index, stock option, securities, asset backed security, derivativemarket, credit derivative, hybrid security, futures, forwards, swaps,corporate bond, government bond, municipal bond, bond valuation,high-yield debt, commodities market, OTC market, and spot market. Thestock indices are selected from a group comprising the following: S&P500 TR index, EAFE US TR index, NASDAQ-100 TR index, Lehman US Aggindex, and LIBOR index.

Although multiple investment options have been listed above this listshould not be considered exhaustive but merely illustrative, as themethod and system described herein may be used with any investmentoption without departing from the spirit of the present invention.

Other objects, features, and characteristics of the present invention,as well as the methods of operation and functions of the relatedelements of the structure, and the combination of parts and economies ofmanufacture, will become more apparent upon consideration of thefollowing detailed description with reference to the accompanyingdrawings, all of which form a part of this specification.

BRIEF DESCRIPTION OF THE DRAWINGS

A further understanding of the present invention can be obtained byreference to a preferred embodiment set forth in the illustrations ofthe accompanying drawings. Although the illustrated embodiment is merelyexemplary of systems and methods for carrying out the present invention,both the organization and method of operation of the invention, ingeneral, together with further objectives and advantages thereof, may bemore easily understood by reference to the drawings and the followingdescription. The drawings are not intended to limit the scope of thisinvention, which is set forth with particularity in the claims asappended or as subsequently amended, but merely to clarify and exemplifythe invention.

FIG. 1 is a diagram depicting several different categories of variableannuity guaranteed benefits.

FIG. 2 is a diagram depicting the management structure of risk elementsand funds in accordance with an embodiment of the present invention.

FIG. 3 is a diagram depicting an alternative management structure ofrisk elements and funds in accordance with an embodiment of the presentinvention.

FIG. 4 is a flow chart depicting the procedures which take place priorto initiating the transaction between the insurance provider and thederivative counterparty in accordance with an embodiment of the presentinvention.

FIG. 5 is a detailed flow chart depicting the steps taken by theinsurance provider prior to initiating the transaction between theinsurance provider and the derivative counterparty in accordance with anembodiment of the present invention.

FIG. 6 is a flow chart depicting procedures which take place uponcompletion of the transaction, in order to facilitate a payment exchangebetween the insurance provider and the derivative counterparty inaccordance with an embodiment of the present invention.

FIG. 7 is a flow chart depicting procedures which take place uponcompletion of the transaction, in order to facilitate a payment exchangebetween the reinsurance provider, the insurance provider and thederivative counterparty in accordance with an embodiment of the presentinvention.

FIG. 8 is a flow chart depicting the calculations performed on the firstreporting date in accordance with an embodiment of the presentinvention.

FIG. 9 is a flow chart depicting the calculations performed for eachreporting date following the first reporting date for each cell inaccordance with an embodiment of the present invention.

FIG. 10 is a flow chart depicting the determination and decrementing ofthe withdrawal dollars, and determination of the claim in accordancewith an embodiment of the present invention.

FIG. 11 is a flow chart depicting procedures involved in thedetermination of the lapse rate in accordance with an embodiment of thepresent invention.

FIG. 12 is a flow chart depicting the determination of the mortalityrate in accordance with an embodiment of the present invention.

FIG. 13 is a flow chart depicting the reset subroutine in accordancewith an embodiment of the present invention.

FIG. 14 is a diagram depicting the system on which the methods of thepresent invention may be implemented in accordance with an embodiment ofthe present invention.

FIG. 15 is a diagram depicting an alternative system on which themethods of the present invention may be implemented in accordance withan embodiment of the present invention.

DETAILED DESCRIPTION

As required, a detailed illustrative embodiment of the present inventionis disclosed herein. However, techniques, systems and operatingstructures in accordance with the present invention may be embodied in awide variety of forms and modes, some of which may be quite differentfrom those in the disclosed embodiment. Consequently, the specificstructural and functional details disclosed herein are merelyrepresentative, yet in that regard, they are deemed to afford the bestembodiment for purposes of disclosure and to provide a basis for theclaims herein, which define the scope of the present invention. Thefollowing presents a detailed description of the preferred embodiment ofthe present invention.

Among other factors, hedging effectiveness on VA guarantees usinggeneric hedging instruments, known as “vanilla hedging instruments,” isdependent upon the size, frequency and correlation of movements incritical capital markets variables. Generally, small changes invaluation inputs will not cause a hedge to materially loseeffectiveness. Depending upon the nature of the guarantee written, aswell as upon the exact instruments chosen for hedging, there are twocharacteristics of VA guarantee liabilities that cause hedgingineffectiveness in existing systems for guaranteeing benefits usinghedging: 1) the instance where valuation inputs experience large and/orsudden changes, and 2) when several of the inputs move together.

The first instance is known as a “higher-order exposure.” Generallyspeaking, this refers to a scenario in which a single valuation inputexperiences a move which is much different (i.e. larger) in size thanthe change used to compute the asset and liability Greeks.

Effectively, what takes place in the higher-order exposure scenario isas follows:

-   -   Greeks are computed for a specified change in a particular        valuation input.    -   Asset and liability Greeks are matched on this basis.    -   The actual change in the valuation input is much larger than the        specified shock implemented in the Greek calculation.    -   The rate of change of the liability Greek with respect to the        valuation input is different than the rate of change of the        asset Greek with respect to the valuation input.    -   The result is that as the change in the valuation input takes        place, the difference between δ_(A) and δ_(L) grows, leaving the        net position mishedged and causing hedging inefficiency.

In mathematical terms, this can be thought of as the second, andhigher-order terms in the following equation known in the art as the“Taylor expansion.”

${{f\left( {x + h} \right)} = {{f(x)} + {\frac{f}{x}{(x) \cdot h}} + {\sum\limits_{i = 2}^{\infty}{{\frac{1}{i!} \cdot h^{i} \cdot \frac{^{i}f}{x^{i}}}(x)}}}},$

Consequently, the change in ƒ is as follows:

${{f\left( {x + h} \right)} - {f(x)}} = {{\frac{f}{x}{(x) \cdot h}} + {\sum\limits_{i = 2}^{\infty}{{\frac{1}{i!} \cdot h^{i} \cdot \frac{^{i}f}{x^{i}}}{(x).}}}}$

A first-order Greek hedge is designed to offset the largest and mostprominent portion of this change, the first term,

${\frac{f}{x}{(x) \cdot h}},$

on the right-hand side of the above equation. In conventional systems,it may not be desirable or possible with traditional hedginginstruments, to fully hedge the incremental “higher order” exposures onthe right hand side of the above equation. This turns out to beinconsequential if h is small since in that case

$\frac{1}{i!} \cdot h^{i}$

will also be very small for i≧2. However, as h increases, theincremental impact of the “higher-order” hedge mismatches becomes moreprominent.

Hedging programs for VA guarantees, and for guarantees on otherfinancial instruments, can sometimes have significant higher-orderexposures. A key example is the change in κ_(L) as implied volatilitychanges (“dVegadVol”). Another key example is the change in δ_(L) theindex price changes, sometimes known as Γ_(L), (“gamma”). Yet a thirdexample, known as the third order exposure, is the change in Γ_(L) asthe index price changes, sometimes also known as “speed.”

The second characteristic of VA and financial product guaranteeliabilities, which cause hedging ineffectiveness in existing systems forguaranteeing benefits using hedging, is related to but slightlydifferent from the previously discussed concept of higher-orderexposure, and is known in the art as “cross-gamma.” Whereas ahigher-order exposure describes hedging inefficiency resulting from alarge move in a single valuation input, a cross-gamma is hedginginefficiency resulting from a hedging mismatch in one Greek created bythe movement of the underlying input, and one or more of the othervaluation inputs.

There are a very large number of possible cross-gammas. Since valuationswith greater than two-factors (such as VA and financial productguarantee liabilities) have an analogous, but exacerbated, form of thisissue, the concept of cross-gamma is illustrated herein with respect toa simplified, two-factor example. For two-dimensional functions, theTaylor series is defined as follows:

${f\left( {{x + h},{y + k}} \right)} = {{f\left( {x,y} \right)} + {\frac{f}{x}{\left( {x,y} \right) \cdot h}} + {\frac{f}{y}{\left( {x,y} \right) \cdot k}} + {{\frac{1}{2} \cdot h^{2} \cdot \frac{^{2}f}{x^{2}}}\left( {x,y} \right)} + {{\frac{1}{2} \cdot k^{2} \cdot \frac{^{2}f}{y^{2}}}\left( {x,y} \right)} + {{h \cdot k}\frac{^{2}f}{{y}{x}}\left( {x,y} \right)} + {O\left( {3 +} \right)}}$

where O(3+) denotes all terms of order 3 and higher. In this case, it isapparent through the cross terms that the change in ƒ is:

${{f\left( {{x + h},{y + k}} \right)} - {f\left( {x,y} \right)}} = {{\frac{f}{x}{\left( {x,y} \right) \cdot h}} + {\frac{f}{y}{\left( {x,y} \right) \cdot k}} + {{\frac{1}{2} \cdot h^{2} \cdot \frac{^{2}f}{x^{2}}}\left( {x,y} \right)} + {{\frac{1}{2} \cdot k^{2} \cdot \frac{^{2}f}{y^{2}}}\left( {x,y} \right)} + {{h \cdot k}\frac{^{2}f}{{y}{x}}\left( {x,y} \right)} + {O\left( {3 +} \right)}}$

and can be decomposed as:

-   -   the first order exposures,

${{\frac{f}{x}{\left( {x,y} \right) \cdot h}} + {\frac{f}{y}{\left( {x,y} \right) \cdot k}}},$

-   -   described above and for which hedging may be more        straightforward,    -   the second-order exposures,

${{{\frac{1}{2} \cdot h^{2} \cdot \frac{^{2}f}{x^{2}}}\left( {x,y} \right)} + {{\frac{1}{2!} \cdot k^{2} \cdot \frac{^{2}f}{y^{2}}}\left( {x,y} \right)}},$

-   -   described above, for which hedging is more difficult but        sometimes possible, and    -   the cross-gamma exposure represented by

${{h \cdot k}\frac{^{2}f}{{y}{x}}\left( {x,y} \right)},$

-   -   which is not present in the single-variable case.

An important concept, as seen above, is that the change in the functionƒ has a term dependent upon the partial derivative with respect to bothvariables. So even if hedging the first and higher-order exposures ofthe two inputs, namely x and y, ineffectiveness is still realized if thetwo variables moved at the same time.

This arises frequently in existing systems, in which interdependenciesamong valuation inputs are common and sometimes quite strong. A few keyexamples would be the dependency of κ_(L) on changes in stocks and/orinterest rates, sometimes referred to as “dVegadSpot” and “dVegadRates.”These cross-gamma exposures can be severe in the case of VA or anotherfinancial product guarantee liabilities and create hedgingineffectiveness when movements in these capital markets inputs occursimultaneously. Generally speaking, the hedging performance decreases asthe size of the changes in the input variables increase.

Thus, for the above described reasons, existing systems for guaranteeingbenefits or underlying assets using hedging are often incomplete andplagued with a lack of certainty that the assets generated from hedgingwould cover the liability stemming from VAGBs.

Because current hedging programs are incomplete and uncertain, there isa clear need in the art for a system and method to more effectivelyredistribute the risk associated with variable annuities and otherfinancial products. The present invention overcomes the variousdeficiencies associated with traditional survival hedging programs.

The present invention comprises a method and system for distributing therisks associated with an insurance instrument (e.g. insurance policy) ora multitude of other non-insurance financial products provided by aninsurance provider or a financial institution to an individual or group.The present invention entails the steps of assessing the behavior of theinsured individual by the insurance provider, modeling the risksassociated with providing insurance to the individual or group by theinsurance provider, assessing the market risks associated with providingthe insurance policy, by a derivative counterparty and assuming, by thederivative counterparty, market risks associated with providing theinsurance instrument.

Wherein the market risks may comprise one or more of the following:risks associated with changes in policy account values and guaranteedminimum withdrawal benefits rights due to changes in the performance ofthe underlying stock and bond mutual funds in which policyholder fundsare invested. Additionally, the behavior risks may comprise one or moreof the following: mortality, withdrawal rates, lapse rates, exercise andnon-exercise of “step-up” rights afforded policyholders. The above listsare merely exemplary of the types of market risks and behavior risks andis not meant to be exhaustive, other types of market risks and behaviorrisks may be applicable and will become apparent upon the implementationof the present invention.

The present invention is described herein in terms of insuranceinstruments and variable annuities. However, skilled artisans willrecognize the systems and methods disclosed are applicable to virtuallyany other non-insurance financial product. Therefore, references toinsurance or annuities are also meant to include any non-insurancefinancial products having risk associated therewith. Additionally, whilean insurance provider may make insurance instruments available, theinsurance company, or any other financial institution, may providenon-insurance financial products covered by the described invention, andmay apply the principles of the present invention to mitigate riskassociated with any offered non-insurance financial products. Thus, anyreferences to an insurance provider or financial institution areintended to encompass all providers of insurance or non-insurancefinancial products.

For example, a financial institution may wish to hedge against riskassociated with mortgage backed securities in much the same way that aninsurance company may wish to hedge against losses that may occur for avariable annuity. In both cases, behavior risks and market risks exists.However, a variable annuity may have behavior risks associated with thebehavior of the individual holding a variable annuity, while thebehavior risk for a mortgage backed securities may include thestatistical behavior of a group of mortgage holders holding mortgagescovered by the mortgage backed security.

Similarly market risks may exits for non-insurance financial products inthe same way that market risks exists for variable annuities. Financialinstitutions and insurance companies may advantageously apply theprinciples of the present invention to any kind of insurance ornon-insurance financial product, regardless of the source of the risk,in order to mitigate similar classes of risk.

The market risks may comprise one or more of the following: risksassociated with changes in policy account values and guaranteed minimumwithdrawal benefits rights due to changes in the performance of theunderlying stock and bond mutual funds in which policyholder funds areinvested. Additionally, the behavior risks may comprise one or more ofthe following: mortality, withdrawal rates, lapse rates, exercise andnon-exercise of “step-up” rights afforded policyholders. The above listsare merely exemplary of the types of market risks and behavior risks andis not meant to be exhaustive, other types of market risks and behaviorrisks may be applicable and will become apparent upon the implementationof the present invention.

FIG. 2 depicts the management structure of risk elements and funds, inthe implementation of the present invention, as well as the relationshipof such aspects of the present invention to both the insurance providerand the derivative counterparty.

The insurance provider 204 manages any risks associated with issuing aninsurance policy. Specifically, the insurance provider 204 isresponsible for assessment of policy risks 208, investment of funds 222,assessment of behavior of insured individuals 206 and non-insurancefinancial products, and assumption of losses resultant from any issuedpolicy 210. Furthermore, the insurance provider 204 passes on to thederivative counterparty 218 any shadow account information 211, fixedrate 214, and cash settlement amount 216. Additionally, the fixed rateamount may be determined using a mortality table, or at least in part bythe average mortality rate. The assessment of behavior refers tostudying the history of filed claims by the insured individual, group,financial product, underlying asset or asset class, and the assessmentof risk refers to a statistical risk associated with providing insuranceto a member of a specific demographic or providing a non-insurancefinancial product in a class or demographic.

In turn, the derivative counterparty 218 manages any risks associatedwith the investment of funds. Specifically, the derivative counterparty218 is responsible for assessment of market risks 220, and assumption ofmarket losses within a guaranteed threshold 224. Furthermore, thederivative counterparty 218 passes on to the insurance provider 204 cashsettlement amount 216.

Alternatively, as depicted in FIG. 3, the insurance provider 204transfers or cedes the risk that would be retained by the insuranceprovider 204 to a reinsurance provider 302. The reinsurance provider 302is responsible for assessment of policy risks 208, investment of funds222, assessment of behavior of insured individuals 206, and assumptionof losses resultant from any issued policy 210. Furthermore, theinsurance provider 204 may elect to maintain management of any aspectsmanaged by the reinsurance provider 302. Additionally, the assessment ofpolicy risks 208 and assessment of behavior of insured individuals 206,financial product or underlying asset, may be done by a party separatefrom the insurance provider 204, reinsurance provider 302 and derivativecounterparty.

Furthermore, the insurance provider 204 passes on to the derivativecounterparty 218 any shadow account information 211, fixed rate 214, andcash settlement amount 216.

In turn, the derivative counterparty 218 manages any market risks orrisks associated with the investment of funds. Specifically, thederivative counterparty 218 is responsible for assessment of marketrisks 220, and assumption of market losses within a guaranteed threshold224. Furthermore, the derivative counterparty 218 passes on to theinsurance provider 204, cash settlement amount 216.

Additionally, the derivative counterparty 218 may enter into anagreement with the insurance provider 204 wherein the derivativecounterparty 218 determines the price for a period of 20 to 50 years forthe services provided to the insurance provider 204 cash settlementamount 216. Furthermore, the derivative counterparty 218 may elect toset the aforementioned price to a fixed amount for any period of time(i.e. 20 to 50 years).

Alternatively, the fixed amount may be determined using a mortalitytable, or at least in part by the average mortality rate or a formulathat utilizes the mortality rate. However, the price may be determinedand fixed for any time period (i.e. 10 years, 7 years, 5 years, 1 year,etc,) agreed upon by all the parties involved without departing for thespirit of the invention.

However, it should be noted, that even though market risk is a separatetype of risk from behavior risk, some residual risk related to marketrisks is maintained in the behavior risks and some residual risk relatedto behavior risks is maintained in the market risks, in the dividedrisks associated with providing an insurance instrument to an individualor group.

Importantly, the present invention may comprise a group of insuranceinstrument or non-insurance financial products. In such an instance, thegroup of insurance instruments may be grouped based at least in part ondemographic characteristics, investment style, product chassis and riderdesign.

FIG. 4 depicts the procedures which take place prior to initiating thetransaction between the insurance provider and the derivativecounterparty. First, the procedure starts in step 400, the insuranceprovider 204 finalizes behavior assumptions for the behavior of thepolicy holder in step 402. At the same time, the insurance provider 204also determines the liability cells in step 404. A cell is an individualunit of data representing specific calculation parameters used inassessing financial liability. Subsequently, the derivative counterpartymodels the assets in step 406, at the same time the insurance provider204 also models the assets in step 408. The asset modeling informationis exchanged between the derivative counterparty and the insuranceprovider 204. Finally, the term sheet and cost are finalized in step 410and the procedure ends in step 412.

FIG. 5 depicts the steps taken by the insurance provider prior to thetransaction between the insurance provider and the derivativecounterparty. First, the procedure starts in step 500 the insuranceprovider consolidates liability information for all in force policiesdesired to be hedged in step 502. The insurance provider then formulatesassumptions for the insured individual or underlying asset's behavior instep 504. Subsequently, the insurance provider breaks in-force policiesdown into cells according to assumed insured individual, financialproduct or underlying asset's behavior, demographic or classcharacteristics, investment style, product chassis, and rider design instep 506. The insurance provider then formulates the term sheet for thedesired derivative transaction in step 508.

The insurance provider assesses the effectiveness of market riskreduction by modeling, pricing and analyzing the derivative in step 510.Afterwards, the insurance provider determines residual risk left by thetransaction as actual behavioral experience deviates from assumedbehavior by modeling, pricing and analyzing the derivative in step 512.A range is then computed for the likely fixed rate on the transaction,in accordance with the option pricing technique (e.g. based on theaverage mortality rate, financial factors, etc) by the insuranceprovider in step 514. Further, the insurance provider determines if thetrade is desirable in terms of effectiveness of market risk reduction,residual risk, and range for the likely fixed rate on the transaction instep 516.

If the trade is determined to have undesirable terms the insuranceprovider iterates this procedure by repeating steps 510 through 516until the terms of the trade are determined to be desirable in step 516.If the trade is determined to be desirable in step 516 the insuranceprovider then determines the potential viable derivative counterpartiesand narrows the potential counterparties considered to a group that willbe given the opportunity to present offers on the derivative transactionin step 518. The insurance provider receives offers from potentialderivative counterparties based on market risks of the offer structuredetermined by the potential derivative counterparties in step 520.

Subsequently, the insurance provider receives pre-trade draftconfirmations associated with offers from the potential derivativecounterparties in step 522. The insurance provider then negotiates theterms of the transaction with the derivative counterparties in step 524.Afterwards, the insurance provider selects the derivative counterpartiesfor participation in the derivative transaction in step 526. Finally,the insurance provider executes the transaction in step 528, theprocedure is then ended in step 530. Although, the above describedprocedures are conducted by the insurance provider, the insuranceprovider may heed the risk associated with issuing the insuranceinstrument to a reinsurance provider. In such an instance thereinsurance provider may conduct any or all of the above procedureswithout departing from the spirit of the present invention.

FIG. 6 depicts procedures which take place upon completion of thetransaction between the insurance provider and the derivativecounterparty. Specifically, the procedures which lead to the paymentexchange between the insurance provider and the derivative counterparty.

The procedure starts in step 600, initially, the insurance provider 204calculates all of the metrics related to administration of the trade instep 602, at the same time the derivative counterparty 218 calculatesall metrics related to the administration of the trade in step 604.Subsequently, the insurance provider 204 calculates the net claimsamount in step 606, while the derivative counterparty 218 calculates thenet fixed rate amount in step 608.

The insurance provider 204 then determines the cash settlement amount instep 610, while the derivative counterparty 218 does the same in step612. Finally, the insurance provider 204 pays or receives the cashsettlement amount in step 614 to/from the derivative counterparty 218depending on whether the cash settlement amount was determined to benegative or positive in the insurance provider's 218 favor, concurrentlythe derivative counterparty 218 does the same in step 616. Upon thecompletion of the payment exchange between the insurance provider 204and the derivative counterparty 218 the procedure terminates in step618.

FIG. 7 depicts the procedures which take place upon completion of thetransaction, in order to facilitate a payment exchange between thereinsurance provider, the insurance provider and the derivativecounterparty.

The procedure starts in step 700, initially the insurance provider 204calculates all of the metrics related to administration of the trade instep 602, while the reinsurance provider 302 does the same in step 702.At the same time the derivative counterparty 218 calculates all metricsrelated to the administration of the trade in step 604. Subsequently,the insurance provider 204 calculates the net claims amount in step 606,the reinsurance provider 302 does the same in step 704. Simultaneously,the derivative counterparty 218 calculates the net fixed rate amount instep 608.

The insurance provider 204 then determines the cash settlement amount instep 610, the reinsurance provider 302 does the same in step 706. At thesame time, the derivative counterparty 218 also determines the cashsettlement amount in step 612. Finally, the insurance provider 204 paysor receives the cash settlement amount in step 614 to/from thereinsurance provider 302 or the derivative counterparty 218, dependingon whether the cash settlement amount was determined to be negative orpositive in the insurance provider's 218 favor, the reinsurance provider302 also pays or receives the cash settlement amount in step 708 inaccordance with conditions agreed upon by the insurance provider 204,the reinsurance provider 302, and the derivative counterparty 218.

Concurrently, the derivative counterparty 218 also pays or receives thecash settlement amount in step 616 to/from the reinsurance provider 302or the insurance provider 204, depending on whether the cash settlementamount was determined to be negative or positive in the insuranceprovider's 218 favor. Upon the completion of the payment exchangebetween the insurance provider 204, the reinsurance provider 302 and thederivative counterparty 218 the procedure terminates in step 710.

FIG. 8 depicts the calculations performed by the insurance provider onthe first reporting date. These calculations are generally performed inorder to account for the risks associated with issuing an insurancepolicy. A one-time roll forward from the cell effective date (“ED”) tothe first reporting date (“FM”), will be described. The procedure startsin step 800, before the procedures depicted in FIG. 8 take place, thecells operated on are liability cells 802, namely cells containing datarelated to any liability resultant from issuing an insurance policy. Instep 804, the total account value (“TAV”) and the guaranteed remainingbenefit (“GRB”) are rolled forward from ED to FM (which may be less ormore than one month). The TAV is the amount of money in a cell at agiven point in time, and is the sum of the money in the fivesub-accounts of the cell, or the value of the assets or financialproducts guaranteed, while the GRB is the amount guaranteed to bereturned with respect to a given cell. The TAV and GRB are rolledforward from ED to FM on the first reporting date, this step isgenerally performed in order to account for market performance and cellbehavior.

In order to roll forward the TAV, GRB and premium base (“PB”) for marketperformance, and estimate behavior in a simplified manner for the periodfrom ED to FM several methods may be used. Wherein the premium base isthe amount multiplied by 1/12^(th) of the withdrawal rate (“WDR”) inorder to produce the amount of withdrawal dollars (“WDD”). For example:

n=FM−ED

Where n is expressed in the number of days. For example, if ED is05/21/2007, and the trade date is 05/29/2007, thenn=05/31/2007−05/21/2007=10 days.

Using this data, the amount guaranteed to be returned on the firstresponding date with respect to a cell, namely the GRBFM, maybecalculated as follows:

GRBFM=GRBEDx(0.96)^((N/365.25))

Thus, using the above results, the sub-account value calculated on thefirst reporting date (“SAViFM”) will be calculated using the followingmethod:

SAViFM=SAViEDx(1−D−R)^((n/365.25)) x(0.96)^((n/365.25)) x(V _(i) ^(FM)/V _(i) ^(ED))

Where V_(i) ^(FM) is the total return index value for index i, as of thefirst valuation date, to occur after ED, and V_(i) ^(ED) is the totalreturn index value for index i as of ED.

Finally, the total account value calculated on the first reporting date(“TAVFM”) and the PB calculated on the first reporting date (“PBFM”)values maybe calculated in the following manner:

${TAVFM} = {\sum\limits_{I = 1}^{5}{SAViFM}}$ andPBFM = PMED * 0.98^(n/365.25)

The sub-account value (“SAV”) for a given adjustment period I is denotedas SAVi. This notation method of the appropriate reporting date islikewise applied to all other relevant variables. The SAV may be relatedto the performance of a number of investment vehicles chosen from agroup of stocks, bonds, real estate and other investment vehicles suchas: insurance dedicated investment vehicle, insurer's general account,money market, stock index, stock option, securities, asset backedsecurity, derivative market, credit derivative, hybrid security,futures, forwards, swaps, corporate bond, government bond, municipalbond, bond valuation, high-yield debt, commodities market, OTC market,real estate market, or spot market.

Although multiple investment options have been listed above this listshould not be considered exhaustive, as the method and system describedherein may be used with any investment option without departing from thespirit of the present invention.

Upon the completion of step 804, the adjustment of duration and age ofthe cells is performed in step 806. Both duration and age are expressedin years in the cell listing. In step 806, duration is first advanced toFM from ED, then converted to months and finally rounded. Age isadvanced to FM from ED, but not rounded. Duration is increased one monthfor each reporting date after the first reporting date, and age isincreased 1/12th of a year each reporting date after the first reportingdate.

The duration calculated on the first reporting date, measured in months(“DFM”) and age calculated on the first reporting date, measured inyears (“AFM”), may be calculated using several methods. For example, onemethod uses the following formulas:

DFM=Round[DED+n/365.25)*12,0]

and

AFM=AED+n/365.25

In step 808, the fees owed to party A for the first reporting date arecalculated. Wherein party A is the insurance provider and party B is thederivative counterparty. The fees owed may be calculated according tothe following formula:

H=TAVFM*F*Q*n/365.25

Where H represents the cash settlement amount on the cash settlementpayment date, to be paid from party B to party A, immediately followingthe first reporting date. Upon completion of step 808, the liabilitycells 802 are converted to asset cells 810, namely cells containing datarelated to assets resultant from investment of fund generated by theinsurance provider, the procedure then ends in step 812.

For each cell as described above, specific calculations will beperformed for each reporting date after the first reporting date, asseen in FIG. 9. These calculations, like those depicted in FIG. 8, areconducted in order to assess the risks and liability caused by issuingan insurance policy.

The procedure starts in step 900, initially the cells operated on arebeginning of the month asset cells 902. In step 904, the TAV is rolledforward. When the TAV is rolled forward several values are calculated.

Wherein the sub-account SAVi maybe one of several types of sub-accountvalues. Some possible sub account values for a given cell are: asub-account value associated with the S&P 500 TR index (“SAV1”), asub-account value associated with the EAFE US TR index (“SAV2”), asub-account value associated with the NASDAQ-100 TR index (“SAV3”), asub-account value associated with the Lehman US Agg index (“SAV4”), anda sub-account value associated with the LIBOR index (“SAV5”).Additionally, a sub account value may be associated with the value orrating of an asset or financial product to be guaranteed.

Thus, if the reporting date is the second reporting date then the SAVi1value is determined using the following equation:

SAVi1=(SAViFM)*(1+TRi−d−r)

For all other reporting dates the SAVi1 value is computed using thefollowing formula:

SAVi1=(SAVi7−1)*(1+TRi−d−r)

Where d and TAV1 values are computed as follows:

d=1−(1−d)^((1/12)) and r=1−(1−R)^((1/12))

and

TAV1=Sum of five SAVi1's

Where TRi is defined as: TRi=(total return index value for index i as ofthe valuation date immediately preceding the reporting date)/(totalreturn index value for index i as of the valuation date immediatelypreceding the prior reporting date)−1.

Furthermore, for the second reporting date the GREB1 and PB1 values arecomputed by evaluating the equations below, respectively:

GRB1=GRBFM

and

PB1=PBFM

For all other reporting dates, the GREB1 and PB1 values are computedusing the methods outlined below, respectively:

GRB1=GRB7−1

and

PB1=PB7−1

Upon the completion of step 904, the WDD is determined and decremented,as well as the claim (if any) is determined in step 906. In step 908 thelapse rate is determined as described in detail below. Once the FLR iscomputed, the mortality rate is determined in step 910.

After the BMR is computed, in step 912, the cell is decremented forlapses and mortality. In step 912 the values for TAV5, GRB5, PB5 andSAVi5 are computed as outlined below, respectively:

TAV5=TAV2*(1−FLR)*(1−BMR)

GRB5=GRB2*(1−FLR)*(1−BMR)

PB5=PB2*(1−FLR)*(1−BMR)

SAVi5=SAVi2*(TAV5/TAV2) unless TAV2=0, In which case SAVi5=0

After the cell is decremented in step 912, for each cell it isdetermined whether the cell is eligible to be reset. In step 914, areset status is determined, namely is a cell eligible for a reset. Eachcell has a reset type of 1 to 6, which identifies a moneyness thresholdat which, if eligible, a reset procedure is executed in step 916, asseen in the table below.

Reset Moneyness Type Threshold 1 15.0% 2 24.4% 3 38.9% 4 60.7% 5 75.0% 6Never

A cell is eligible for a reset if it has a duration greater than orequal to sixty (60) months, and has not yet reset. Additionally, thecell is eligible for a reset if it has previously reset, and theduration as of the reporting date the cell's last reset was sixty (60)or more months less than the current duration. If a cell is not reseteligible, it will not reset.

If a cell is determined to be eligible for a reset in step 914, and GRB5is greater than zero (0), a reset subroutine is executed in step 916. Ifa reset is not applied after step 914, then the GRB6 value is equal tothe GRB5 value, and PB6 is equal to the PB5 values. Furthermore, theabove formulas result in there being two ways a reset can increasewithdrawals for the cell. Namely, the PB6 increases and/or thewithdrawals are taken for a longer period of time. If the GRB5 has hitzero, the cell can still reset.

If a reset has occurred after step 914, in step 1306, a rider charge isadjusted. If a reset occurs then the rider charge (“R”) for that cellbecomes 50 bps, or 0.5%, which it may or may not have already been,starting on the following reporting date, but not on the currentreporting date.

In step 918, a rebalance status is determined and applied. If the cellhas a rebalance type Y, as indicated by the corresponding cellparameter, then TAV6 is divided into five SAVi7's in the followingmanner:

SAVi7=TAV6*SAViP

However, if the cell is rebalance type N then SAVi7 equals SAVi6.Regardless of the rebalance type, the values of TAV7, GRB7 and PB7 areequal to TAV6, GRB6, and PB6 respectively. Furthermore, if a cell isrebalance type N, its allocation changes each reporting date after thefirst reporting date with index performances only; if it is rebalancetype Y, its allocation changes each reporting date after the firstreporting date with both index performance and rebalancing actions asdefined above. However, in some instances a rebalance may not berequired, in such instances determining a rebalance status in step 918may be skipped.

Finally, the cash settlement amount is determined in step 920. First theamount party B owes to party A (“H”) and the amount party A owes toparty B (“B”) values are determined. Wherein, party A is the insuranceprovider and party B is the derivative counterparty. The Hand B valuesare computed respectively as follows:

H=F*Q*TAV7/12

B=C*Q

If H>B, then party B pays party A a cash settlement amount equal to H−Bat the immediately following cash settlement payment date.

If H<B, then party A pays party B a cash settlement amount equal to B−Hat the immediately following Cash settlement payment Date.

If H=B, exactly the cash settlement amount at the immediately followingcash settlement payment date is zero.

All of the above calculations are done for each cell, as well as summed,and the actual cash settlement amount in respect of a cash settlementpayment date is based on the aggregate result across all cells. Theprocedure ends in step 924, upon the completion of the proceduresdepicted in FIG. 9, the beginning of the month asset cells 902 becomeend of the month asset cells 922.

FIG. 10 depicts the procedures of step 906, namely the determination anddecrementing of the WDD, and determining the claim 906. First, theprocedure starts in step 1000, the withdrawal status is determined instep 1002. Each cell is defined as one of five WD Types, with WD rulesbased, in part, on duration, as shown in the table below. For example,the value of duration is increased one (1) month every reporting dateafter the first reporting date. Once a cell starts withdrawing, it doesnot stop withdrawing until there is no more GRB to be withdrawn.

WD Type WD Rule A This WD Type withdraws immediately. B This WD Typewithdraws stating at Duration 37. C This WD Type starts withdrawing atthe earlier of Duration 73 or when TAV1 is equal to or less than 56.67%of GRB1. D This WD Type starts withdrawing at the earlier of Duration125 or when the TAV1 is equal to or less than 56.67% of GRB1. E Thiscell never withdraws.Using the above table, it becomes apparent that if a cell is notwithdrawing this reporting date, then it is not in withdrawal status.However, if a cell is withdrawing this reporting date, it is inwithdrawal status.

In step 1004 the WDR is determined. Each cell has a WDR type: H, L or Z.H stands for high, and indicates a 7% WDR. L stands for low, andindicates a 4.5% WDR, unless the cell entered claims status in a priorreporting date. If a WDR type L cell enters claims status this reportingdate, then in the next reporting date (not the reporting date it entersclaims status) and in all later reporting dates, the cell will have aWDR of 7%. WDR type Z has a WDR of 0%.

In step 1006 the WDD is determined. If the cell is not in withdrawalstatus the WDD value is equal to zero (0). However, if the cell is inwithdrawal status the WDD value is evaluated by computing the equationbelow:

WDD=Min[GRB1,(WDR/12)*PB1]

In step 1008, the WDD is decremented and the claim (if any) isdetermined. First, the TAV2 value is computed using the method below:

TAV2=Max(0,TAV1−WDD)

If the TAV2 value is zero (0), then the SAVi2 value is also zero.However, if the TAV2 value does not equal zero (0), the SAVi2 value iscomputed as follows:

SAVi2=SAVi1*(TAV2/TAV1)

If the claim is greater than zero (0) then the cell is in claim status.In order to determine whether the cell is in claim status the followingmethod is used:

C=Max(0,WDD−TAV1)

Finally, the GRB and PB values are determined using the method outlinedbelow, respectively: the GRB is:

GRB2=Max(0,GRB1−WDD)

and the PB2 value is equal to PB1. Upon the completion of step 1008, theprocedure ends in step 1010.

FIG. 11 depicts the procedures of step 908. First, the procedure startsin step 1100, then in step 1102, the BLR is determined. The monthly coreand monthly outlook BLR values in the chart below determine the BLR forthe cell by using the product type of the cell, which is either core oroutlook.

Duration Monthly Core Monthly Outlook  1-12 0.0837177359120589%0.0837177359120589% 13-24 0.1682142552739570% 0.1682142552739570% 25-360.1682142552739570% 0.1682142552739570% 37-48 0.2535048613836690%0.3396053198917560% 49-60 0.3396053198917560% 2.3688424222606800% 61-720.4265318777560640% 1.3451947011868900% 73-84 0.6029308066126890%1.0596241035319000% 85-96 1.8423470126248300% 0.8741610954696720% 97-108 1.0596241035319000% 0.8741610954696720% 109-1200.8741610954696720% 0.8741610954696720% 121+ 0.8741610954696720%0.8741610954696720%

Further, in step 1104, the ALR is determined. If the cell is inwithdrawal status the ALR value is computed using the following method:

ALR=0.75*BLR

However, if the cell is not in withdrawal status the method forcomputing the ALR value is adjusted as follows:

ALR=1.05*BLR

In the next step, step 1106, the final lapse rate (FLR) is determined.If the cell is in claim status (i.e. GRB2=0 and TAV2=0), then the FLRwill also equal zero (0). However, if TAV2 is less than or equal to GRB2(i.e. TAV2≦GRB2), then the FLR is defined as follows:

FLR=ALR*Min[1,TAV2/(GRB2*0.85)]

Furthermore, if the product type is core, and the duration≦84, or if theproduct type is outlook and the duration≦48, then the FLR is equal toALR. However, if in this scenario the GRB2 is zero (0), then the FLRvalue is twice the ALR value (i.e. FLR=ALR*2).

In all other cases the FLR value is evaluated by computing:

FLR=ALR*Min{2,Max[1,1+(TAV2−1.2*GRB2)/GRB2]}

After the completion of step 1106, the procedure of FIG. 11 terminatesin step 1108.

FIG. 12 depicts the procedures of step 910. When the mortality rate isbeing determined in step 910, the procedure starts in step 1200, the AMRis first determined in step 1202. Age is increased 1/12th of a yearevery reporting date after the first reporting date. The AMRs are listedin the table below as the male and female mortality rates on an annualbasis. The AMRs are based on the attained age of the cell at the time ofcalculation on an “age-last basis,” meaning that the cell uses age xbelow if its age as of the current reporting date is greater than orequal to x but not greater than or equal to x+1.

Age Male AMR Female AMR 50 0.31272% 0.13176% 51 0.34592% 0.14344% 520.38040% 0.15592% 53 0.41600% 0.16960% 54 0.45280% 0.18520% 55 0.49048%0.20328% 56 0.52944% 0.22424% 57 0.57112% 0.24824% 58 0.61752% 0.27544%59 0.67072% 0.30568% 60 0.73264% 0.33928% 61 0.80512% 0.37624% 620.89064% 0.41680% 63 0.99128% 0.46152% 64 1.10944% 0.51088% 65 1.24736%0.56512% 66 1.40632% 0.62536% 67 1.58432% 0.69448% 68 1.77832% 0.77616%69 1.98536% 0.87376% 70 2.20240% 0.99080% 71 2.42832% 1.13024% 722.66960% 1.29280% 73 2.93440% 1.47848% 74 3.23104% 1.68736% 75 3.56776%1.91936% 76 3.95104% 2.17480% 77 4.38064% 2.45376% 78 4.85424% 2.75672%79 5.37000% 3.08392% 80 5.92560% 3.43560% 81 6.51872% 3.81240% 827.14560% 4.21528% 83 7.80200% 4.64568% 84 8.48376% 5.10456% 85 9.18688%5.59344% 86 9.93360% 6.12560% 87 10.70960% 6.70960% 88 11.52584%7.35480% 89 12.38872% 8.10832% 90 13.30456% 8.94000% 91 14.25712%9.84608% 92 15.23680% 10.85040% 93 16.24056% 11.96616% 94 17.43232%13.20824% 95 18.72688% 14.59352% 96 19.87488% 16.14056% 97 21.11632%17.76352% 98 22.46424% 19.51192% 99 23.93232% 21.45480% 100 25.53480%23.61496% 101 27.28688% 26.01800% 102 29.20416% 28.71176% 103 31.44816%31.66744% 104 34.18040% 35.06880% 105 37.56248% 39.02528% 106 41.75560%43.67088% 107 46.92144% 49.14472% 108 53.22144% 55.59080% 109 60.81720%63.15792% 110 100.00000% 100.00000%

Further, in step 1204 the BMR is determined. The BMR is determined bycomputing the following formula:

BMR=1−[1−(PM)*(Male AMR)−(1−PM)*(Female AMR)]^((1/2))

This BMR applies whether or not the cell is in claims status. Theformula above is a simplification of blending that intentionally ignoresany future changes in the percentage survivorship of males versusfemales that would change the blending ratios. The blending ratiosremain as defined above. After the completion of step 1204, theprocedures of FIG. 12 terminate in step 1206.

FIG. 13 depicts the procedures of step 916. When a reset subroutine isexecuted 916, the procedure starts in step 1300, then a determination iscarried out if the cell is to be reset in step 1302, if a cell is not tobe reset the procedure terminates in step 1308. If a reset is needed areset is applied in step 1304, only if the value of the computationTAV5/GRB5 is greater than or equal to one added to the moneynessthreshold. However, If a cell is reset eligible, and GRB5 is zero (0),then the cell will reset if it is reset type 1, 2, 3, 4 or 5, but itwill not reset if it is reset type 6.

When a reset is applied, the TAV6 value is the same as the TAV5 value,and the SAVi6 value is equal to the SAVi5 value for the five (5) SAVi's.Furthermore, if a reset is applied the GRB6 and PB6 values aredetermined respectively, as follows:

GRB6=TAV6

PB6=Max(PB5,TAV6)

If a reset is not applied after step 914, then the GRB6 value is equalto the GRB5 value, and PB6 is equal to the PB5 values. Furthermore, theabove formulas result in there being two ways a reset can increasewithdrawals for the cell. Namely, the PB6 increases and/or thewithdrawals are taken for a longer period of time. If the GRB5 has hitzero, the cell can still reset.

If a reset has occurred after step 914, in step 1306, a rider charge isadjusted. If a reset occurs then R for that cell becomes 50 bps, or0.5%, which it may or may not have already been, starting on thefollowing reporting date, but not on the current reporting date. Afterthe completion of step 1306, the procedure of FIG. 13 terminates in step1308.

FIG. 14 depicts an embodiment of a system on which the methods describedabove may be implemented. The present invention relates to an improvedvoluntary insurance product system, apparatus and method which includesat least one central processing computer or computer network server.Network server includes at least one controller or central processingunit (CPU or processor), at least one communication port or hub, atleast one random access memory (RAM), at least one read-only memory(ROM) and one or more databases or data storage devices. All of theselater elements are in communication with the CPU to facilitate theoperation of the network server. The network server may be configured inmany different ways. For example, network server may be a conventionalstandalone server computer or alternatively, the function of server maybe distributed across multiple computing systems and architectures.

Network server may also be configured in a distributed architecture,wherein databases and processors are housed in separate units orlocations. Some such servers perform primary processing functions andcontain at a minimum, a RAM, a ROM, and a general controller orprocessor. In such an embodiment, each of these servers is attached to acommunications hub or port that serves as a primary communication linkwith other servers, client or user computers and other related devices.The communications hub or port may have minimal processing capabilityitself, serving primarily as a communications router. A variety ofcommunications protocols may be part of the system, including but notlimited to: Ethernet, SAP, SAS.TM., ATP, Bluetooth, GSM and TCP/IP.

Data storage device may include a hard magnetic disk drive, opticalstorage units, CD-ROM drives, or flash memory. Data storage devicecontains databases used in processing transactions and/or calculationsin accordance with the present invention, including at least aninsurance subscriber database and an insurance database. In oneembodiment, database software creates and manages these databases.Insurance related calculations and/or algorithms of the presentinvention are stored in storage device and executed by the CPU.

The controller comprises a processor, such as one or more conventionalmicroprocessors and one or more supplementary co-processors such as mathco-processors. The processor is in communication with a communicationport through which the processor communicates with other devices such asother servers, user terminals or devices. The communication port mayinclude multiple communication channels for simultaneous communicationwith, for example, other processors, servers or client terminals. Asstated, devices in communication with each other need not be continuallytransmitting to each other. On the contrary, such devices need onlytransmit to each other as necessary, may actually refrain fromexchanging data most of the time, and may require several steps to beperformed to establish a communication link between the devices.

The processor also is in communication with a data storage device. Thedata storage device may comprise an appropriate combination of magnetic,optical and/or semiconductor memory, and may include, for example, RAM,ROM, flash drive, an optical disc such as a compact disc and/or a harddisk or drive. The processor and the data storage device each may be,for example, located entirely within a single computer or othercomputing device; or connected to each other by a communication medium,such as a USB port, serial port cable, a coaxial cable, an Ethernet typecable, a telephone line, a radio frequency transceiver or other similarwireless or wireline medium or combination of the foregoing.

The data storage device may store, for example, (i) a program (e.g.,computer program code and/or a computer program product) adapted todirect the processor in accordance with the present invention, andparticularly in accordance with the processes described in detailhereinafter with regard to the controller; (ii) a database adapted tostore information that may be utilized to store information required bythe program. The database includes multiple records, each recordincludes fields that are specific to the present invention such asinterest rates, premiums, subscribers, payouts, claims, etc.

The program may be stored, for example, in a compressed, an uncompiledand/or an encrypted format, and may include computer program code. Theinstructions of the program may be read into a main memory of theprocessor from a computer-readable medium other than the data storagedevice, such as from a ROM or from a RAM. While execution of sequencesof instructions in the program causes the processor to perform theprocess steps described herein, hard-wired circuitry may be used inplace of, or in combination with, software instructions forimplementation of the processes of the present invention. Thus,embodiments of the present invention are not limited to any specificcombination of hardware and software.

Suitable computer program code may be provided for performing numerousfunctions such as: distributing the risks associated with an insuranceinstrument or financial instrument provided by an insurance provider ora financial institution to an individual or a group, grouping aplurality of insurance instruments or financial instruments into relatedcells, analyzing the behavior of the individual, group or financialinstrument by the insurance provider, and modeling a separate derivativetransaction to account for the market risks assumptions associated witheach cell of the insurance instrument or financial instrument.

Additionally, suitable computer program code may be provided forperforming the following functions: formulating behavioral and marketrisk assumptions about each cell of the insurance instrument orfinancial instrument, establishing the separate derivative transactionwith a derivative counterparty, assuming by the derivative counterpartymarket risks associated with the insurance instrument or financialinstrument. The functions described above are merely exemplary andshould not be considered exhaustive of the type of function which may beperformed by the computer program code of the present inventions.

The computer program code required to implement the above functions (andthe other functions described herein) can be developed by a person ofordinary skill in the art, and is not described in detail herein.

All of the modules described herein are operably inter-connected via abi-directional connection with a central serial bus 1430. The serial bus1430 serves to receive information from every single module, as well asto transmit information from one module to another. The insuranceprovider 204 transmits and receives data, to and from the computingsystem 1416 via a communication module 1400. The communication module1400 transmits and receives data, to and from the computing system 1416via any standard electronic means known in the art. The computing system1416 consists of: a display module 1402, a data entry module 1404, and aprocessing module 1406. The processing module 1406 may be used fordividing the risks associated with providing an insurance instrument toan individual or group into behavior risks and market risks, identifyingthe market risks for transfer outside of the insurance provider,formulating behavioral and market risk assumptions about an insuranceinstrument (wherein if the insurance instrument is divided into cells itmay also be used for analyzing each cell), determining a cash settlementamount to be exchanged between an insurance provider, a reinsuranceprovider and a derivative counterparty (e.g. as payment for a derivativetransaction) as well as guaranteeing by the derivative counterparty tothe insurance provider a minimum return on investment.

The computing system 1416, additionally comprises a calculation module1408, the calculation module 1408 may be used for modeling the risksassociated with providing insurance to an individual or group,calculating a net fixed rate amount, modeling the insurance provider'sexposure under the insurance instrument wherein behavior risks areseparated from market risks, calculating the net amount of funds movedas a result of claims, as well as calculating data related to anadministration of a trade. Importantly, the present invention maycomprise a group of insurance instrument or non-insurance financialproducts. In such an instance, the group of insurance instruments may begrouped based at least in part on demographic characteristics,investment style, product chassis and rider design.

Furthermore, the computing system 1416 includes a risk assessment module1410, wherein the risk assessment module 1410 may be used for assessingthe risks associated with the issuance of an insurance instrument, andwherein the risks include market risks and behavior risks.

The computing system 1416 also includes a reporting module 1418 formaking periodic reports regarding the status or performance of aninsurance instrument or a financial product. Finally, the computingsystem includes an analysis module 1412. The analysis module 1412 isused for analysis of behavior of insured individuals as well asassessing the market risks associated with providing an insuranceinstrument.

The data storage module 1414 is external to the computing system 1416,for the purposes of allowing further controls of data access, to beimplemented if needed. However, a data storage module 1414 which isinternal to the computing system 1416 may be used without departing fromthe spirit of the present invention. Further, liability information forin force policies or financial products may be consolidated within thedata storage module 1414. The computing system 1416 is further operablyconnected to a second communication module 1400, the communicationmodule 1400 is in turn connected to the derivative counterparty 218. Thederivative counterparty 218 receives and transfers information, from andto the insurance provider 204 via the communication module 1400.Furthermore, the second communication module 1400 may also used forpassing market risks to any external party (e.g. a derivativecounterparty), as well as transferring a cash settlement amount betweenthe derivative counterparty and an insurance provider.

Additionally, the computing system 1416 includes: a text data inputmodule 1430 for inputting data in the form of text, and an optical datainput module 1420 for converting to digital format documents and imagesand inputting them into the computing system 1416.

Finally, the computing system 1416 includes: an audio data input module1422 for receiving and inputting audio information, a memory module 1424for temporarily storing information as it is being processed by theprocessing module 1406, a universal serial bus interface module 1426 forreceiving and transmitting data to and from devices capable ofestablishing a universal serial bus connection, and a digital data inputinterface module 1428 for receiving data contained in digital storagedevices (e.g. floppy disk, zip drive, 8 mm digital tape, etc).

The term “computer-readable medium” as used herein refers to any mediumthat provides or participates in providing instructions to the processorof the computing device (or any other processor of a device describedherein) for execution. Such a medium may take many forms, including butnot limited to, non-volatile media, volatile media, and transmissionmedia. Non-volatile media include, for example, optical or magneticdisks, such as memory. Volatile media include dynamic random accessmemory (DRAM), which typically constitutes the main memory. Common formsof computer-readable media include, for example, a floppy disk, aflexible disk, hard disk, magnetic tape, any other magnetic medium, aCD-ROM, DVD, any other optical medium, punch cards, paper tape, anyother physical medium with patterns of holes, a RAM, a PROM, an EPROM orEEPROM (electronically erasable programmable read-only memory), aFLASH-EEPROM, any other memory chip or cartridge, a carrier wave asdescribed hereinafter, or any other medium from which a computer canread.

Various forms of computer readable media may be involved in carrying oneor more sequences of one or more instructions to the processor (or anyother processor of a device described herein) for execution. Forexample, the instructions may initially be borne on a magnetic disk of aremote computer. The remote computer can load the instructions into itsdynamic memory and send the instructions over an Ethernet connection,cable line, or even telephone line using a modem. A communicationsdevice local to a computing device (or, e.g., a server) can receive thedata on the respective communications line and place the data on asystem bus for the processor. The system bus carries the data to mainmemory, from which the processor retrieves and executes theinstructions. The instructions received by main memory may optionally bestored in memory either before or after execution by the processor. Inaddition, instructions may be received via a communication port aselectrical, electromagnetic or optical signals, which are exemplaryforms of wireless communications or data streams that carry varioustypes of information.

Servers of the present invention may also interact and/or control one ormore user devices or terminals. The user device or terminal may includeany one or a combination of a personal computer, a mouse, a keyboard, acomputer display, a touch screen, LCD, voice recognition software, orother generally represented by input/output devices required toimplement the above functionality. The program also may include programelements such as an operating system, a database management system and“device drivers” that allow the processor to interface with computerperipheral devices (e.g., a video display, a keyboard, a computer mouse,etc).

Although the system describe above has been depicted in terms of aninsurance instrument, the system can also be used with a financialproduct.

Alternatively, as depicted in FIG. 15, the insurance provider 204 mayelect to transfer, or cede the risk that would be retained by theinsurance provider 204 to a reinsurance provider 302. Wherein, thereinsurance provider 302 transmits and receives data, to and from thecomputing system 1416 via a communication module 1400. A secondcommunication module 1400 transmits and receives data, between thecomputing system 1416 and the reinsurance provider 302 via any standardelectronic means known in the art. The computing system 1416 consistsof: a display module 1402, a data entry module 1404, and a processingmodule 1406. The processing module 1406 may be used for dividing therisks associated with providing an insurance instrument to an individualor group into behavior risks and market risks, identifying the marketrisks for transfer outside of the insurance provider, determining a cashsettlement amount to be exchanged between an insurance provider,formulating behavioral and market risk assumptions about an insuranceinstrument (wherein if the insurance instrument is divided into cells itmay also be used for analyzing each cell), a reinsurance provider and aderivative counterparty (e.g. as payment for a derivative transaction)as well as guaranteeing by the derivative counterparty to the insuranceprovider a minimum return on investment.

The computing system 1416 additionally comprises a calculation module1408, the calculation module 1408 may be used for modeling the risksassociated with providing insurance to an individual or group,calculating a net fixed rate amount, modeling the insurance provider'sexposure under the insurance instrument wherein behavior risks areseparated from market risks, calculating the net amount of funds movedas a result of claims, as well as calculating data related to anadministration of a trade.

Furthermore, the computing system 1416 includes a risk assessment module1410, wherein the risk assessment module 1410 may be used for assessingthe risks associated with the issuance of an insurance instrument, andwherein the risks include market risks and behavior risks.

The computing system 1416 also includes a reporting module 1418 formaking periodic reports regarding the status or performance of aninsurance instrument or a financial product. Finally, the computingsystem includes an analysis module 1412. The analysis module 1412 isused for analysis of behavior of insured individuals as well asassessing the market risks associated with providing an insuranceinstrument.

The data storage module 1414 is external to the computing system 1416,for the purposes of allowing further controls of data access, to beimplemented if needed. However, a data storage module 1414 which isinternal to the computing system 1416 may be used without departing fromthe spirit of the present invention. Further, liability information forin force policies or financial products may be consolidated within thedata storage module 1414. The computing system 1416 is further operablyconnected to a second communication module 1400, the communicationmodule 1400 is in turn connected to the derivative counterparty 218. Thederivative counterparty 218 receives and transfers information, from andto the insurance provider 204 via the communication module 1400.Furthermore, the second communication module 1400 may also used forpassing market risks to any external party (e.g. a derivativecounterparty, reinsurance provider, etc), as well as transferring a cashsettlement amount between an insurance provider, a reinsurance providerand a derivative counterparty.

Additionally, the computing system 1416 includes: a text data inputmodule 1430 for inputting data in the form of text, and an optical datainput module 1420 for converting to digital format documents and imagesand inputting them into the computing system 1416.

Finally, the computing system 1416 includes: an audio data input module1422 for receiving and inputting audio information, a memory module 1424for temporarily storing information as it is being processed by theprocessing module 1406, a universal serial bus interface module 1426 forreceiving and transmitting data to and from devices capable ofestablishing a universal serial bus connection, and a digital data inputinterface module 1428 for receiving data contained in digital storagedevices (e.g. floppy disk, zip drive, 8 mm digital tape, etc).

Although the system describe above has been depicted in terms of aninsurance instrument, the system can also be used with a financialproduct.

Additionally, the systems described in FIGS. 14 and 15 may be used in aderivative transaction, by the derivative counterparty 218, theinsurance provider 204 and reinsurance provider 302.

The systems described in FIGS. 14 and 15 may be used to generate andoffer a group of insurance instrument or non-insurance financialproducts. In such an instance, the group of insurance instruments may begrouped based at least in part on demographic characteristics,investment style, product chassis and rider design.

The present invention in addition to being applied to all types ofinsurance can be applied to the general field of debt includingmortgages, consumer debt, consumer loans, credit card debt, debit carddebt, auto loans, corporate loans, corporate debt, lease management,debt consolidation, IRA, government loans, student loans, retirementloans, retirement accounts, and any type of money lending in general.While the present invention has been described with reference to thepreferred embodiment and alternative embodiments, which embodiments havebeen set forth in considerable detail for the purposes of making acomplete disclosure of the invention, such embodiments are merelyexemplary and are not intended to be limiting or represent an exhaustiveenumeration of all aspects of the invention. The scope of the invention,therefore, shall be defined solely by the following claims. Further, itwill be apparent to those of skill in the art that numerous changes maybe made in such details without departing from the spirit and theprinciples of the invention. It should be appreciated that the presentinvention is capable of being embodied in other forms without departingfrom its essential characteristics.

Although the invention described herein has been discussed in terms ofan insurance policy for exemplary purposes, it can be equally applied toany other insurance instrument or non-insurance financial product.Furthermore, the invention described herein has been discussed in termsof an individual purchasing an insurance instrument for exemplarypurposes, it can be equally applied to any individual or grouppurchasing an insurance instrument.

1. A method of accounting for the risk associated with providing aninsurance instrument by an insurance provider and mitigating market riskby a derivative counterparty, wherein an account is associated with theinsurance instrument and the insurance instrument causes risk of lossesto the insurance provider, comprising the steps of: rolling the totalaccount value forward from the policy effective date to the first of atleast one reporting periods for the account associated with theinsurance instrument; rolling a guaranteed remaining benefits forwardfrom a policy effective date to the first of the at least one reportingperiods for the account associated with the insurance instrument; andcalculating, on a computing system, fees owed by the derivativecounterparty to the insurance provider using, at least in part, the datarelated to insurance instrument duration as well as guaranteed remainingbenefits.
 2. The method of claim 1 and further comprising the step of:adjusting of data related to insurance instrument duration for theaccount associated with the insurance instrument.
 3. The method of claim2 wherein the sub-account value is determined by an investment vehicleselected from a group comprising the following: insurance dedicatedinvestment vehicle, insurer's general account, money market, stockindex, stock option, securities, asset backed security, derivativemarket, credit derivative, hybrid security, futures, forwards, swaps,corporate bond, government bond, municipal bond, bond valuation,high-yield debt, commodities market, OTC market, real estate market, andspot market, wherein the stock index is selected from a group comprisingthe following: S&P 500 TR index, EAFE US TR index, NASDAQ-100 TR index,Lehman US Agg index, and LIBOR index.
 4. A method of accounting for therisk associated with providing an insurance instrument by an insuranceprovider as well as market risks by a derivative counterparty, for atleast one reporting period, comprising the steps of: determining, on acomputing system, a total account value for an account associated withan insurance instrument; rolling the total account value forward;determining the amount of withdrawal dollars for the account;decrementing the amount of withdrawal dollars; determining a claim, alapse rate and a mortality rate for the account; and adjusting theaccount value for lapses and for mortality.
 5. The method of claim 4wherein the account value is at least in part determined by asub-account value.
 6. The method of claim 5 wherein the sub-accountvalue is determined by an investment vehicle.
 7. The method of claim 4and further comprising the step of determining a rebalance status. 8.The method of claim 7 and further comprising the step of determining acash settlement amount by calculating fees owed by the derivativecounterparty to the insurance provider at least in part using therebalance status and the account value.
 9. The method of claim 6 whereinthe sub-account value is determined by an investment vehicle selectedfrom the group of: insurance dedicated investment vehicle, insurer'sgeneral account, money market, stock index, stock option, securities,asset backed security, derivative market, credit derivative, hybridsecurity, futures, forwards, swaps, corporate bond, government bond,municipal bond, bond valuation, high-yield debt, commodities market, OTCmarket, real estate market, and spot market.
 10. A system fordetermining a cash settlement amount used as payment for a transactionbetween an insurance provider and a derivative counterparty, comprising:a calculation module for calculating data related to administration ofsaid transaction between said insurance provider and said derivativecounterparty as well as calculating the net amount of funds moved as aresult of claims; and a processing module for determining a cashsettlement amount.
 11. The system of claim 10 and wherein saidcalculation module further calculates a net fixed rate amount.
 12. Thesystem of claim 11 further comprising a communications module fortransferring said cash settlement amount between said insurance providerand said derivative counterparty.
 13. A method for determining a cashsettlement amount used as payment for a transaction between an insuranceprovider, a reinsurance provider, and a derivative counterparty,comprising the steps of: calculating, on a computing system, datarelated to administration of the transaction between the insuranceprovider, the reinsurance provider, and the derivative counterparty;calculating a net fixed rate amount; and determining a cash settlementamount.
 14. The method of claim 13 wherein determining a cash settlementamount is based, at least partially, on calculating net amount of fundsmoved as a result of claims.
 15. The method of claim 14 and furthercomprising the step of: transferring the cash settlement amount betweenthe insurance provider, the reinsurance provider, and the derivativecounterparty.
 16. A method for executing at least one derivativetransaction between an insurance provider and a derivative counterparty,comprising the steps of: consolidating liability information for inforce policies in a data storage module; formulating, on a computingsystem, assumptions for behavior of a relevant insured individual'sbehavior; formulating a term sheet for the at least one derivativetransaction; computing a range for a likely fixed rate on the at leastone derivative transaction; determining potential derivativecounterparties; receiving offers by the insurance provider from thepotential derivative counterparties based on market risks of the offerstructure determined by the potential derivative counterparties; andselecting the derivative counterparties for participation in the atleast one derivative transaction.
 17. The method of claim 16 and furthercomprising the step of: breaking in-force policies down into cellsaccording to assumed insured individual's behavior, demographiccharacteristics, investment style, product chassis, and rider design.18. The method of claim 16 and further comprising the step of: assessingthe effectiveness of market risk reduction by modeling, pricing andanalyzing the derivative hedging transaction.
 19. The method of claim 18and further comprising the step of: determining residual risk left bythe at least one derivative transaction as actual behavioral experiencedeviates from assumed behavior by modeling, pricing and analyzing the atleast one derivative transaction.
 20. The method of claim 19 and furthercomprising the step of: adjusting the market risk reduction, residualrisk, and range for the likely fixed rate on the at least one derivativetransaction until the at least one derivative transaction is desirable.21. The method of claim 16 wherein the at least one derivativetransaction is executed between an insurance provider, reinsuranceprovider, and a derivative counterparty.
 22. The method of claim 18 andfurther comprising the steps of: receiving, by the insurance provider,pre-trade draft confirmations associated with offers from the potentialderivative counterparties; and negotiating terms of the at least onederivative transaction with the potential derivative counterparties. 23.The method of claim 22 wherein the step of receiving offers by theinsurance provider from the potential derivative counterparties furthercomprises narrowing the potential counterparties considered to a groupthat will present offers on the at least one derivative transaction. 24.The method of claim 23 and further comprising the step of: determiningif the at least one derivative transaction is desirable in terms ofeffectiveness of market risk reduction, residual risk, and range for thelikely fixed rate on the at least one derivative transaction.
 25. Themethod of claim 24 and further comprising the step of: executing the atleast one derivative transaction.